GDP Is Up, But Per Capita It's Far From Its Highs

Earlier today we learned that the Second Estimate for Q3 real GDP came in at 2.7%, up from the Advance Estimate of 2.0%. Let's now review the numbers on a per-capita basis.

For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in current dollars for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale.

I've drawn an exponential regression through the data using the Excel GROWTH() function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 10.2% below the regression trend.

The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 19 quarters beyond the 2007 GDP peak, real GDP per capita is still 1.45% off the all-time high following the deepest trough in the series.

Here is a more revealing snapshot of real GDP per capita, specifically illustrating the percent off the most recent peak across time, with recessions highlighted. The underlying calculation is to show peaks at 0% on the right axis. The callouts shows the percent off real GDP per-capita at significant troughs as well as the current reading for this metric.

The standard measure of GDP in the US is expressed as the compounded annual rate of change from one quarter to the next. The current real GDP as of the Q3 Advance Estimate is 2.7 percent. But with a per-capita adjustment, the data series is quite different. The real per-capita GDP is currently at 2.0 percent. Both a 10-year moving average and the slope of a linear regression through the data show that the US economic growth has been slowing for decades.

To expand on the illustration above: Since 1960 mean (average) GDP is 3.1 percent. Mean GDP per capita is 2.0 percent.

Year-Over-Year (YoY) GDP Percent Change and Recession Risk

Economists and financial journalists vary widely in their opinions about the present-day level of recession risk. The official call on recessions, of course, is the domain of the National Bureau of Economic Research, which makes the determination on recession start and end several months — sometimes more than a year — after the fact.

GDP per capita, as we've seen, is a weaker series than GDP. What does it suggest about our current recession risk? The next chart shows the YoY change in real GDP per capita since 1960. I've again highlighted recessions. The red dots show the YoY real GDP for the quarter before the recession began, and the dotted line gives us a sense of how the current level compares to recession starts since 1960. This chart suggests that, despite the obvious weakness in the economy, this indicator is not recessionary. That said, we must remember that GDP is a lagging indicator of the economy, and the Third Estimates and next year's annual GDP revisions will almost certainly change the latest data points.

As the chart illustrates, the latest YoY real GDP per capita, at 1.79% is higher than the level at the onset of all the recessions in this series with one exception — the second and more painful half of the early 1980's double dip. That recession was a outlier in that it was to some extent knowingly engineered by the Fed (then Chairman Paul Volcker), an inevitable side-effect of raising the Fed Funds Rate north of 19% to break the back of the stagflation of the era. Here is a snapshot that illustrates the extreme Fed maneuver.